I've just started with GTD, and this was one of the hardest things to get my head round; I'd always used hanging folders to 'sort' my files.
But now I've done a complete 180, and follow David's suggestion of a single A-Z system.
The filing cabinets I have don't come with back plates (nor can they be bought as extras) so I was hitting a wall with files slipping and falling down. The solution was to simply buy enough empty folders so that there were enough in each drawer to pack it upright.
The only hanging folders I use now are labelled A to Z, are empty, and simply separate the folders themselves.
The only exceptions to the A-Z filing are opportunities/proposals, home-specific stuff like utility bills and personal finances, and the Tickler File, which each have their own cabinets.